The Institute of Chartered Accountants of Pakistan (ICAP) has proposed the Ministry of Finance to offer similar incentives to the manufacturing sector as have been given to the construction sector in the upcoming budget (2021-22).
The ICAP has submitted ‘model federal budget 2021-22’ to the Ministry of Finance based on financial priorities of the nation.
The document revealed that Large Scale Manufacturing (LSM) has long remained under a constrained economic environment under the shadow of exchange rate depreciation and restrictive monetary and fiscal policies. Costs of industrial inputs, frequent and repetitive implementations of stabilization and revenue measures, and lower domestic demand have been the key factors behind this lackluster performance of LSM.
The government should offer similar incentives to the manufacturing sector as have been given to the construction sector. Since it covers a large part of the GDP, the said incentives are likely to give a boost to the economy and push the GDP towards achieving the growth rate of 6% and beyond.
With a view to allow growth in Small Scale Manufacturing (SSM), the government needs to facilitate the units falling under this sector with proper market access and ensure availability of loans at minimal mark-up so that SSM industry is able to realize its full potential and generate a significant contribution in GDP.
The wholesale & retail trade (WRT) is a well-recognized sector all over the world. The growth in population, individual income levels, availability of bank loans, and aggressive marketing techniques has raised the demand for consumer goods. The growing demand and consumption, accordingly, provided the impetus to the producers and suppliers at all levels, hence wholesale & retail trade has flourished manifold in the country.
Nonetheless, despite many positive aspects, it is noted with concern that the tax contribution by the sector remained dismal and below the expectations and potential. If the largest sub-sector, in terms of establishments in the country, pays due taxes, it would be an immense support for the government to reach a reasonable level of tax-to-GDP ratio.
As such, this sub-sector needs taxation reforms and a reduction in the tax rate. It can be expected that with a lower level of tax rates this sector would be encouraged to discharge its liability towards the state which would result in a significant rise in revenues for the government, ICAP proposed.
In the present economic condition which is also affected by the Covid-19 pandemic, it is more than likely that the FBR may not be able to reach a tax revenue target of Rs. 6,000 billion in the next fiscal year, it said.
The FBR has been able to achieve double-digit growth in the first nine months of the current fiscal year and surpassed the target by more than Rs. 100 billion. The provisional net collection grew by 10.9% to Rs. 3,395 billion during the July-March period of this fiscal here as against Rs. 3,060 billion last year. Total domestic tax collection grew by 10.7%, of which direct tax collection grew by 9.1%, sales tax by 13.2%, and FED increased by 2.8%. In March 2021 alone, the provisional net collection increased by 49.4% to Rs. 481 billion as against Rs. 322 billion in March 2020. For the month of March, the provisional net collection exceeded the target by Rs. 114 billion.
As per sensitivity analysis of FBR’s revenue and the consequent impact on fiscal deficit, the ICAP has presented two assumptions. One, in case FBR’s tax collection in 2021-22 remains at Rs. 5,750 billion instead of the targeted Rs. 6,000 billion, the projected federal budget deficit would be around Rs. 3,665 billion. This would be Rs.100 billion more or 7.73% of GDP in a single year when compared to 7.52% of GDP originally projected in the model budget.
Secondly, if FBR only manages to collect Rs.5,500 billion in 2021-22, against the target of Rs. 6,000 billion, the budget deficit would swell by Rs. 200 billion from the currently projected Rs. 3,565 billion to Rs. 3,765 billion. In relation to GDP, the budget deficit would be 7.94% compared to 7.52% as projected for 2021-22, ICAP added.
The target seems unlikely to achieve in view of projected GDP at 4% and inflation at 8%. The realistic target, therefore, may not be more than Rs. 5,265 billion. The collection of the remaining Rs. 735 billion is still possible but only if strong and radical regulatory actions are taken. Scope and quantum of taxation need to be widened to those segments from where no or insignificant taxes are generated in order to bring in the required revenue.
For example, the share of agriculture and wholesale trade in total direct taxes is around 1.5%, although these sectors make up 42% in aggregate of the real GDP. Similarly, the exports constitute 10% of the GDP but only contribute 1% in direct taxes.
There is an urgent need to tap the potential of these sources for their optimum contribution towards the national exchequer which will not only remove inequities in the tax regime; but will also provide the much-needed additional revenue to the government.
